In re Sgsm Acquisition Co., LLC

• Decision Date: 06 February 2006
• Docket Number: No. 05-30455.,No. 05-30445.,05-30445.,05-30455.
• Citation: 439 F.3d 233
• Parties: In the Matter of: SGSM ACQUISITION COMPANY, LLC, Debtor. G.H. Leidenheimer Baking Company, Ltd., Appellant, v. R. Patrick Sharp, III, Appellee. In the Matter of: SGSM Acquisition Company, LLC, Debtor. Patton Sausage Company, Inc.; A.T. Patton Company, Inc., Appellants, v. R. Patrick Sharp, III, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

439 F.3d 233

In the Matter of: SGSM ACQUISITION COMPANY, LLC, Debtor.

G.H. Leidenheimer Baking Company, Ltd., Appellant, v. R. Patrick Sharp, III, Appellee.

In the Matter of: SGSM Acquisition Company, LLC, Debtor.

Patton Sausage Company, Inc.; A.T. Patton Company, Inc., Appellants, v. R. Patrick Sharp, III, Appellee.

No. 05-30445.

No. 05-30455.

United States Court of Appeals, Fifth Circuit.

February 6, 2006.

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William C. Gambel (argued), Milling Benson Woodward, New Orleans, LA, for Appellants.

Jamie Dodds Cangelosi (argued), Douglas S. Draper, Deborah W. Fallis, Heller, Draper, Hayden, Patrick & Horn, New Orleans, LA, for Appellee.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before JONES, Chief Judge, and DeMOSS and CLEMENT, Circuit Judges.

EDITH H. JONES, Chief Judge:

Appellants G.H. Leidenheimer Baking Company, Ltd. ("Leidenheimer") and Patton Sausage Company ("Patton") bring this consolidated appeal, challenging the lower courts' treatment of preference payments each received from a grocery store chain before it filed bankruptcy. See 11 U.S.C. § 547(b). Because none of the payments at issue qualified for the ordinary course of business defense,¹ and the subsequent advance defense was properly applied to both appellants, we AFFIRM as to Patton and AFFIRM AS MODIFIED with respect to Leidenheimer.

I. Background

Debtor SGSM, which operated a chain of grocery stores, continued to pay many suppliers during the ninety-day preference period prior to its filing for Chapter 11 bankruptcy relief. Leidenheimer and Patton, in turn, continued to supply SGSM stores with bakery goods and meats and were paid accordingly. The preference period lasted from December 25, 1998, to March 25, 1999. At issue in this appeal are two suppliers' defenses based upon 11 U.S.C. § 547(c)(2) (ordinary course of business) and 11 U.S.C. § 547(c)(4) (subsequent advances). Absent such defenses, the payments are voidable as preferences under 11 U.S.C. § 547(b).

SGSM made six payments totaling $49,246.78 to Leidenheimer during the preference period. In an adversary proceeding brought by SGSM's liquidation agent, Leidenheimer asserted that the payments were subject to both the subsequent advance and ordinary course of business defenses. The bankruptcy court allowed only the subsequent advance defense as to all six payments. After deducting subsequent new value from each SGSM payment, $8,014.09 remained avoidable by the trustee as a preference.²

Patton received eight payments for a total of $140,162.56 during the preference period. The bankruptcy court, in another adversary proceeding, accorded these payments the same legal status as those to Leidenheimer. After the court allowed only a subsequent advance defense as to all eight payments, Patton was ordered to return $47,437.31 as a preference.

The district court affirmed the bankruptcy court in both cases, rejecting the ordinary course defense as to all payments and further holding that Leidenheimer and Patton were prohibited by law from applying two preference defenses in tandem to the same payment. The parties appealed pursuant to 28 U.S.C. § 158(d).

II. Discussion

The preference provision of the Bankruptcy Code furthers the purpose of equitable distribution among creditors by authorizing the trustee (or debtor-in-possession) to recover most payments made by the debtor on account of antecedent debt within ninety days before bankruptcy. The theory is that when the preferential payments are returned, all creditors can share ratably in the debtors' assets, and the race to the courthouse, or the race to receive payment from a dwindling prebankruptcy estate, will be averted. Because some creditors, however, receive payments for shipping supplies that enable the debtor to continue doing business, to that extent they act to forestall an ultimate bankruptcy filing. Congress enacted several affirmative defenses against preference recovery in order to balance the competing interests. Two of the most important defenses are at issue in the case: that for payments in the ordinary course of business and that for subsequent advances given the debtor.

The lower courts' treatment of these defenses will be reviewed by our standard criteria. In bankruptcy cases, this court "perform[s] the same function, as did the district court: Fact findings of the bankruptcy court are reviewed under a clearly erroneous standard and issues of law are reviewed de novo." Nationwide Mut. Ins. Co. v. Berryman Prods. (In re Berryman), 159 F.3d 941, 943 (5th Cir. 1998). A finding of fact is not clearly erroneous "if it is plausible in the light of the record read as a whole." Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba), 416 F.3d 394, 402 (5th Cir.2005).

Evidentiary rulings are reviewed under the abuse of discretion standard. Pipitone v. Biomatrix, Inc., 288 F.3d 239, 243 (5th Cir.2002). "A trial court abuses its discretion when its ruling is based on an erroneous view of the law or a clearly erroneous assessment of the evidence." Bocanegra v. Vicmar Servs., Inc., 320 F.3d 581, 584 (5th Cir.2003). We first address the ordinary course of business defense asserted by both appellants.

A. Ordinary Course of Business Defense

The Bankruptcy Code states that a payment made during the preference period need not be returned to the debtor's estate

to the extent such transfer was —

(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and transferee;

(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and

(C) made according to ordinary business terms.

11 U.S.C. § 547(c)(2). A creditor asserting an ordinary course of business defense must prove all three statutory elements by a preponderance of the evidence. Gulf City Seafoods, Inc. v. Ludwig Shrimp Co. (In re Gulf City Seafoods), 296 F.3d 363, 367 (5th Cir.2002). The first element is not at issue here, as the debts incurred by SGSM to the appellants arose out of ordinary transactions to keep its grocery stores supplied. Section 547(c)(2)(B), which asks whether the transfer was made according to the ordinary business affairs of the parties, is the "subjective" prong of the ordinary course defense. Finally, in examining industry practice under § 547(c)(2)(C), the relevant inquiry is "`objective'; that is to say, we compare the credit arrangements between other similarly situated debtors and creditors in the industry." Id. at 368. Some latitude exists under the objective prong, as the court should not impose a single norm for credit transactions within an industry; the inquiry is whether "a particular arrangement is so out of line with what others do" that it cannot be said to have been made in the ordinary course. Id. at 368-69. As to what constitutes the relevant industry, Gulf City held that the term ordinarily encompasses "suppliers to whom [the debtor] might reasonably turn for [similar supplies] and firms with whom [the debtor] competes for customers." Id. at 369. Each appellant challenges the court's application of the subjective and objective elements of the defense.

There were no unusual features of SGSM's payments, e.g., no extra charges or penalties, within the preference period other than their being somewhat delayed. The dispute over the subjective prong thus dealt with a comparison of the average invoice-to-payment intervals before and during the preference period.

Leidenheimer asserted an ordinary course of business defense to all six payments made by SGSM.³ The bankruptcy court conducted its analysis according to Gulf City and determined that the average time between invoice and payment during the pre-preference period was twenty-one days and the median was seventeen days. In the preference period, however, the average jumped to 38.67 days, with a median of 37. Leidenheimer makes much out of the fact that the bankruptcy court averaged all payments, neglecting to examine each payment "individually," but this is not the case. Indeed, the court examined each set of invoices and payments individually and concluded that only the payment made on February 19, 1999 (discharging invoices an average of 25.22 days old), was made in the parties' ordinary course of business. On appeal, while still contending that all SGSM payments were made in the ordinary course, Leidenheimer emphasizes the payments made on February 12 and 19, 1999. The February 12 payment is difficult to fit within the subjective prong; Leidenheimer itself states that this payment discharged invoices 35.37 days old on average. Both payments were made significantly later than those during the pre-preference period. Based on these facts, it was not clearly erroneous for the bankruptcy court to conclude that only the February 19, 1999, payment satisfied the subjective prong of ordinary course analysis.

Patton fares better on the subjective prong analysis. We need not recount the evidence in detail to conclude that the lower courts correctly found at least three payments to Patton, made on February 19, March 9, and March 19, 1999, satisfied the subjective prong.

The larger issue for both suppliers, however, is the objective prong of ordinary course analysis.⁴ Whether a creditor has met its burden in proving this prong "belongs[]with the bankruptcy judge. We only say that the judge must satisfy himself or herself that there exists some basis in the practices of the industry to authenticate the credit arrangement at issue." Gulf City, 296 F.3d at 369. The parties agreed that the relevant industry is grocery DSD (direct store delivery). To prove that the SGSM payments were made in the ordinary course for the industry, Leidenheimer offered testimony from two experts: Nicholas Pyle and John Stephens. Pyle is a lobbyist for a bakers' trade group, and Stephens...